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Delivering a sustainable energy future in South Africa

In a recent sector briefing, KPMG International examined how mining companies can leverage sustainable development to tackle resource constraints and socio-political challenges in remote areas in the world. To provide context, the sector briefing contained a series of case studies, providing unique insights from KPMG’s work with companies in key mining countries. Here we deal with South Africa.

The mining sector is a powerful enabler for sustainable development and has the potential to improve the performance of the local economy. By adopting sustainable practices, mining companies can gain competitive advantage, increase their market share, and improve shareholder value through the early detection of business risks.

In South Africa the importance of energy in mining can be seen from the three inter-related perspectives of security of supply, cost, and environmental impacts – which are directly related to the government ́s strategic themes of growth, performance, and compliance. Managing the links between industry trends and strategic themes calls for an integrated approach that is suited to this complex operating environment.

Investment in energy infrastructure

More than a decade of under-investment in the energy infrastructure has severely undermined the security of the energy supply in South Africa. In 2008, rolling blackouts and interruptions brought energy efficiency and captive power generation to the top of many corporate agendas.

The government’s US$62 billion infrastructure investment programme, which is aimed to alleviate shortages, is estimated to increase average annual electricity prices by over 25% from 2010 to 2013. Furthermore, increasing energy prices are being compounded by rising costs of labour and raw materials.

Securing a sustainable energy future is inextricably linked to managing carbon emissions, where mining companies are expected to play a key role in meeting the South African government’s emissions reduction target of 34% by 2020 relative to business as usual. This goal is expected to be put into operation through a proposed carbon tax, which is expected to be implemented in mid-2012 and will have a material affect on the cost of production.

A low-cost, sustainable energy supply is critical

There are concerns that a carbon tax would make South Africa’s export coal industry unprofitable which in turn will adversely impact employment in the country. Major coal producers are requesting an alternative approach to a carbon tax.

These measures include government to provide incentives to steel producers to develop technologies to improve efficiencies standards setting and carbon trading. The transition to a low-cost, sustainable energy supply is fundamentally linked to the future of mining in South Africa, and it’s critical for mining companies to understand how the management of resource and social issues can impact business operations and ultimately long-term competitiveness.

In cases where energy is available, managing costs is critical to retaining competitive advantage in a tough operating environment. These aims cannot be achieved at the expense of unchecked rises in carbon emissions, which is now as much a matter of compliance as it is of performance.

Mining companies must begin to work strategically with national and local governments as well as with local communities to discuss issues and potential conflicts concerning energy security, water availability, economic development, and environmental impacts. Mining companies need to be able to design risk management programmes and productivity plans that are linked to sustainable development in order to play the role of strategic partner.

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